KYC: How Crypto Platforms Verify Customers

KYC (know your customer) is a process in which a company checks who its customer is. The company collects identification data, such as a name and a date of birth, and verifies it against reliable sources. KYC is one of the measures of anti-money laundering and counter-terrorist financing (AML/CFT), and the term is also used in crypto.

What Does KYC Mean?

The words “know your customer” describe the company’s task: the company needs to know who its customer is. KYC in crypto is the name used when a crypto platform checks who its customer is.

In KYC, to verify is to check information against reliable sources that are independent of the customer.

KYC is often used as a synonym for customer due diligence, the term that professional regulators use for the full set of KYC checks.

In addition, “know your customer” can name a different check: whether a regulated financial product is suitable for the customer it is sold to. KYC in the sense of identifying and verifying a customer is a separate process.

Why Do Regulated Companies Carry Out KYC?

In some countries, rules for regulated companies call for KYC. A regulated company is a company that operates under the rules of a regulator. A regulator is a public body that oversees an industry, and a commercial bank under a banking regulator is one example of a regulated company.

Rules on KYC are aimed at money laundering (disguising the criminal origin of money) and terrorist financing. Usually, KYC starts when a company takes on a customer and continues through monitoring for as long as the company serves that customer.

What Measures Does KYC Include?

The measures commonly described for KYC are listed here.

1. Identify and verify the customer. The company collects the customer’s identification data, such as a name and a date of birth, and checks it against reliable sources.
2. Identify the beneficial owner. the company finds out which individual in the end owns or controls the customer, where there is one, and takes reasonable steps to verify that individual’s identity.
3. Understand the relationship. the company learns the purpose and intended nature of its relationship with the customer, meaning why the customer wants the service and how the customer expects to use it.
4. Monitor the relationship. the company monitors the relationship with the customer over time and keeps the information it holds on the customer up to date.

KYC verification can also take place without meeting the customer in person. An electronic identification process is a digital way of confirming who a person is. A financial regulator’s guide says that an electronic identification process may be regarded as a reliable source for checking identity if the process is independent of the person being checked.

What Data Does KYC Collect?

KYC collects identification data about the customer. For an individual, an older guide to account opening by an international committee of banking supervisors lists data such as a legal name, a permanent address, a date of birth, a place of birth, nationality, and an official identification number from a photo identity document. A newer version has since replaced that guide, so the items are examples, not a current requirement.

Documents used in KYC include passports, identity cards, and driver’s licenses. The exact data a company collects depends on the rules that apply, and those rules differ between countries.

The identification data that KYC collects is personal data, which is information about an identifiable person. A financial regulator’s guide for the companies it supervises says that those companies need to consider their data protection obligations when they handle this data.

KYC vs AML/CFT: How Do They Differ?

KYC covers the checks that a company carries out on its customer. AML/CFT is the wider set of measures aimed at money laundering and terrorist financing, and KYC is one of its measures.

AML/CFT also includes keeping records and monitoring transactions. Keeping records means storing information about customers and their transactions. Monitoring transactions means watching them so that suspected criminal activity can be reported to the authorities.

Why Does the Depth of KYC Checks Vary?

KYC checks vary in depth. A risk-based approach means that a company matches the amount of checking to its assessment of how likely a customer is to be linked to money laundering or terrorist financing. Because the amount of checking follows that assessed risk, KYC does not name one fixed set of checks.

Under a risk-based approach, a company that assesses a customer as lower risk can apply simplified measures. Simplified measures involve less checking, and they are still KYC, not an exemption from it. For a customer assessed as higher risk, the company applies enhanced measures. Enhanced measures involve more checking and are known as enhanced due diligence.